Portfolio Management Flashcards
What is the portfolio perspective to investing?
The portfolio perspective refers to evaluating individual investments by their contribution to the risk and return of an investor’s portfolio
What are the benefits of diversification?
Diversification allows an investor to reduce portfolio risk without necessarily reducing the portfolio’s expected return.
In what circumstances would diversifying not be beneficial?
If the correlation of all the stocks in the portfolio = +1
What were Markowitz’s conclusions about diversification from his 1950 studies?
Unless the returns of the risky assets are perfectly positively correlated, risk is reduced by diversifying across assets
What is the formula for the diversification ratio?
( Diversification\ ratio = \frac{Standard\ deviation\ of\ equally\ weighted\ portfolio}{Standard\ deviation\ of\ a\ random\ security} )
What is the impact on diversified portfolios during times of financial crisis?
During periods of financial crisis, correlations tend to increase, which reduces the benefits of diversification. Diversification tends to work best when markets are operating normally
What are the three steps in the portfolio management process?
- Planning
- Execution
- Feedback
Which investor has a high risk tolerance, long term investment horizon, low liquidity needs and varying income needs depending on age?
DB pension schemes
Which investor has a low risk tolerance, a short investment horizon and high liquidity needs?
A bank
Which investor has a longer time horizon, DB pension schemes or life insurance companies?
Life insurance companies
A retirement plan in which the firm contributes a sum each period to the employee’s retirement account. Investment decisions and risk sit with the employee, the firm assumes none of the risk. What type of pension scheme is this describing?
A defined contribution pension plan
A firm promises to make periodic payments to employees after retirement. The employer assumes the investment risk. What type of pension scheme is this describing?
A defined benefit pension scheme
Who holds the risk in a defined contribution plan?
The employee holds the risk as the investment risk sits with them
Who holds the risk in a defined benefit plan?
The contributing firm holds the risk as they need to meet a set obligation upon the employees retirement
Who needs to fund the shortfall if investment performance along cannot fund a defined benefit pension?
The employer
Firms that manage investments for clients, are better known as…?
Asset management firms
What is the difference between a full service and a specialist asset manager?
Full-service asset managers are those that offer a variety of investment styles and asset classes
Specialist asset managers may focus on a particular investment style or a particular asset class
A holding company that includes a number of different specialist asset managers, is also known as a…?
Multi-boutique asset management firm
What is the difference between active and passive management?
Active management attempts to outperform a chosen benchmark through manager skill, for example by using fundamental or technical analysis
Passive management attempts to replicate the performance of a chosen benchmark index.
How much of total global AUM is passive?
20% of global AUM
Why has passive management become more popular in recent times?
Passive managers charge investors lower fees, and in part to questions about whether active managers are actually able to add value over time on a risk-adjusted basis
What securities do traditional asset managers invest in?
Equities and fixed-income securities
What securities do alternative asset managers invest in?
Private equity, hedge funds, real estate, or commodities
A portfolio that is owned by a single investor and managed according to that investor’s needs and preferences is called a…?
Separately managed account